The Driehaus strategy essentially uses the “buy high and sell higher" principle to select the best stocks that have the potential to substantially outperform the market. The success of this investment approach eventually helped Richard Herman Driehaus get a place in Barron’s All-Century Team.
The American Association of Individual Investors (AAII) proved that the strategy has the potential to offer high-than-market returns. AAII’s portfolio, which was based on the Driehaus strategy, has returned 324.3% since the end of the last bear market compared with more 87.3% gains registered by the S&P 500.
A Detailed Look Into the Strategy
Driehaus once said, “I would much rather invest in a stock that’s increasing in price and take the risk that it may begin to decline than invest in a stock that’s already in a decline and try to guess when it will turn around.” In line with this insight, AAII took into account the percentage change in 50-day moving average as one of the key criteria to create a portfolio based on Driehaus’ philosophy.
It is calculated by dividing a stock’s month-end price minus 50-day moving average of month-end price by the 50-day moving average of the month-end price. Another momentum indicator — positive relative strength — has also been included in this strategy. A positive percentage change in 50-day moving average indicates that the stock is trading at a price higher than its 50-day moving average level, indicating an uptrend.
Moreover, AAII found that the Driehaus strategy primarily focuses on strong earnings growth rates and impressive earnings projections for picking potential outperformers. Companies with a strong history of beating estimates are also given importance in this strategy, which was made to provide better returns over the long term.
• Zacks Rank equal to #1
No matter whether good market or bad, stocks with a Zacks Rank #1 (Strong Buy) have a proven history of outperformance. You can see the complete list of today’s Zacks #1 Rank stocks here.)
• Last 5-year average EPS growth rates above 2%
Strong EPS growth history ensures improving business
• Trailing 12-month EPS growth greater than 0 and industry median
Higher EPS growth compared to the industry average indicates superior earnings performance
• Last four-quarter average EPS surprise greater than 5%
Solid EPS surprise history indicates better price performance
• Positive percentage change in 50-day moving average and relative strength over 4 weeks
Positive percentage change in 50-day moving average and relative strength signal uptrend
• Momentum Score equal to or less than B
Favorable momentum score indicates that it is ideal to take advantage of the momentum with the highest probability of success.
These few parameters have narrowed down the universe of over 6,865 stocks to only 19.
Here are five of the 19 stocks:
Agnico Eagle Mines Limited AEM is engaged in exploration, development and production of mineral properties. It has a Momentum Score of A and an average four-quarter positive earnings surprise of more than 100%.
Anixter International Inc. is a provider of enterprise cabling and security solutions, electrical and electronic wire and cable solutions as well as utility power solutions. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 16.6%.
Vector Group Ltd. VGR is a manufacturer and seller of cigarettes. It has a Momentum Score of B and an average four-quarter positive earnings surprise of 72.4%.
PennyMac Financial Services, Inc. PFSI is a provider of mortgage banking and investment management services. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 12.1%.
Kirkland Lake Gold Ltd. KL is engaged in acquisition, development and exploration of gold properties. It has a Momentum Score of A and an average four-quarter positive earnings surprise of 11.1%.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance